Brokers’ take: RHB upgrades Frencken to ‘buy’, raises price target to S$1.45

RHB Research has turned positive on Frencken Group , as it now expects the semiconductor and machine manufacturer’s earnings to recover in 2024.

The research house on Monday (Nov 27) upgraded its call on the stock to “buy” from “neutral” upon observing “signs of revenue and earnings bottoming out” in the group’s third quarter financials released last week.

Despite reporting a continued year-on-year decline in revenue, analyst Alfie Yeo said he is positive on the group’s turnover growth, which was reflected on a quarter-on-quarter basis.

“Most segments’ revenue growth was driven by rising demand, which we believe is the start of next year’s anticipated recovery,” said the analyst.

“Our outlook for its segmental revenue is now more positive, as management is guiding for revenue to increase in all of its key segments except for the automotive (expected to be stable year on year) and industrial automation (anticipated to decline year on year) segments.”

To reflect the research house’s expectations of improving revenue and margins ahead, RHB has raised its FY2023 to FY2025 revenue estimates by 2 per cent to 7 per cent. Its earnings forecast for FY2024 to FY2025 were raised by 7 per cent to 12 per cent.

This has resulted in a higher target price of S$1.45 compared to S$0.97 previously.

The revised target also values Frencken at a higher price-to-earnings multiple of 14 times on FY2024 earnings projections, which is one standard deviation above the stock’s mean.

Yeo said that this new valuation is “loftier” than the previous target multiple of just 10 times.

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“As Frencken’s environmental, social and corporate governance score is 3 out of 4 – on par with our country median – we apply a 0 per cent discount/premium to its intrinsic value to derive our target price,” he added.

Shares of Frencken were trading S$0.01 or 0.9 per cent higher at S$1.14 as at 10.27 am on Monday.